Break-even and total cost
A refinance replaces your mortgage with a new one, usually to get a lower rate. It costs money up front, typically a few percent of the loan in lender and title fees. Two numbers decide whether it is worth it. The break-even month is when the monthly savings have paid back those costs. The total cost compares what each loan costs over the years you actually expect to keep it, payments and fees plus whatever balance is still owed at the end.
Take a $280,000 balance at 7.9% with 27 years left. A new 30-year loan at 7.4% with $6,000 of closing costs lowers the payment from $2,093.06 to $1,938.66, saving $154.40 a month. It breaks even at month 57 (4 years 9 months). Over 7 years the old loan costs $427,924 and the new one $425,608.
A lower payment is not always a lower cost
Stretching the remaining term back to 30 years lowers the payment partly by spreading the balance over more years. With only ten years left on the old loan, a new 30-year loan at 7.4% drops the payment from $3,382.40 to $1,938.66, but over those ten years it costs $481,127 against $405,887, and you are left owing for twenty more. The calculator shows both answers so the lower payment does not hide a higher cost.
Going the other way, a 15-year loan at 6.71% raises the payment to $2,471.54 but saves interest fast: over 7 years its total cost is $396,824.
Closing costs and points
Closing costs include the lender's origination charge, appraisal, title insurance, recording fees and any points. A point is a fee of 1% of the loan paid to lower the rate. Points make sense only if you keep the loan long enough for the lower payment to repay them; the break-even month answers that question for points just as it does for the other costs. Enter the total from the loan estimate as the closing costs and the reduced rate as the new rate.
Rolling the costs into the new balance keeps cash in hand. In the example that raises the new payment to $1,980.21 and puts break-even at never within the years you keep it. A "no-closing-cost" refinance works the other way: the lender covers the costs in exchange for a higher rate, which suits a short horizon.
What the inputs mean
- Current balance, rate and years left: from your latest mortgage statement.
- New rate and term: from a lender's loan estimate. The rate field starts at the latest weekly average.
- Closing costs: the total from the loan estimate, including points.
- Years you will keep it: your best guess at when you will sell or refinance again.
Common mistakes
- Judging by the payment alone. Check the total cost over your horizon.
- Ignoring the years already paid. Restarting at 30 years adds interest you had already worked past.
- Refinancing just before a move. If the break-even month is after you sell, the costs are lost.
Refinance questions
How do I know if refinancing is worth it?
Compare the break-even month with how long you will keep the loan. Moving $280,000 from 7.9% to 7.4% with $6,000 of closing costs saves $154.40 a month and breaks even at month 57 (4 years 9 months). If you expect to sell or refinance again before then, the switch costs money.
Should I roll closing costs into the loan?
It keeps cash in your pocket but you pay interest on the costs. Rolled in, the new payment on the same example is $1,980.21 instead of $1,938.66, and the total cost over 7 years is $428,600 against $425,608 paid up front.
How much lower does the rate need to be?
There is no fixed rule. A small drop can pay off on a large balance kept for many years, while a big drop may not cover the costs on a small balance you will sell soon. The break-even month and the total cost over your horizon answer it for your own loan.
What about a cash-out refinance?
A cash-out refinance borrows more than you owe and hands you the difference. It usually carries a slightly higher rate and resets the term, so check the total cost here with the larger balance, and compare it with a home equity loan, which leaves your first mortgage alone.
Sources
Mortgage rates: Freddie Mac weekly averages as of . How we calculate.